Risk-Profiling Defined Benefit Pension Schemes

A dynamic stochastic optimization model of strategic assetliability management is useful in advising underfunded defined benefit pension schemes on best practice for returning to solvency and long-term stability. The authors present an overview of the dynamic stochastic programming techniques involved and briefly describe the nature of Pioneer Investment's proprietary CASM simulator from which the asset class returns and pension scheme liabilities are generated. The stochastic optimization model is described precisely in the article as well as its solution using linear programming. To illustrate the approach, the authors offer two examples of defined benefit schemes using simple, conservative, fund liability models. The optimal dynamic asset allocations of the two examples reflect the motivation of second generation liability-driven investment schemes. Although the final salary scheme models are simple, more complex models can be incorporated with little extra effort into the system described by the authors. Most actuarial assessments used in practice can be modeled for this purpose.